The IPO party is coming to an end. In the past year the IPO market
has experienced a major pull back causing many startups to see their valuations return to reality. Since the beginning of 2015 companies have raised only $30 billion in the IPO market as compared to the $82 billion raised at this point last year. More telling is the number of high profile companies such as Neiman Marcus Group and Albertson’s that have decided to indefinitely delay their IPOs. These companies have been deterred from going public because of the market’s increased volatility and the recent poor performance of many IPOs. This year 42% of IPOs are trading below their issue price which has spooked many companies that feel that they can still achieve their goals without an IPO. Additionally, many companies do not want to risk the prospect of a “down” IPO which would harm existing investors especially those that invested in later rounds.
One of the biggest surprises in this year’s IPO market is Square. The company was created by Twitter co-founder, Jack Dorsey, in 2009 and has since become the leader in small business transactions. The Square Reader has been adopted by more than 2 million businesses and processed $32.4 billion in transactions last year. However, the increased transaction volume has not translated into profits and has instead produced a widening loss of $131 million. The absence of profits coupled with the fact that CEO Jack Dorsey is splitting his time between Twitter and Square has caused the company to price its IPOs at $12 - $13. At this price the company will have a valuation of $3.9 billion, which is well below its last private round valuation of $6 billion. Fortunately for investors, Square has built in protections that require it to give the most recent investors a greater share in the company to make up for a "down" IPO. However, the poor pricing of Square demonstrates the difficult conditions in the IPO market.
Square’s IPO shows that the era of easy money for tech companies is winding down. There seems to be a new more realistic era beginning in Silicon Valley that poses a risk to the more than 120 Unicorns that are enjoying insane valuations. However, there is still room for companies with unique and innovative technology to succeed in this IPO market. In the end, it will come down to the timing, market conditions and the quality of the business.
-Spencer Hanus (NYU Stern '18)